SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-Q
               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 1999
                           Commission File No. 0-23629


                                 Happy Kids Inc.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


          New York                                     13-3473638
--------------------------------            ------------------------------------
 (State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
  Incorporation or Organization)


100 West 33rd Street, Suite 1100, New York, New York                  10001
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                            (Zip Code)


                                 (212) 695-1151
                         -------------------------------
                         (Registrant's Telephone Number,
                              Including Area Code)


        Indicate by check mark whether the  Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                  Yes:   X                          No:
                      -------                          -------

        Indicate the number of shares  outstanding  of each of the  Registrant's
classes of common stock, as of April 30, 1999:

             Class                                  Number of Shares
             -----                                  ----------------

  Common Stock, $.01 par value                         10,375,693


<PAGE>


                        HAPPY KIDS INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS
                                -----------------


                                                                           Page
                                                                           ----

PART I.   CONDENSED CONSOLIDATED FINANCIAL INFORMATION.....................  1

  Item 1.  Condensed Consolidated Financial Statements.....................  1

           Condensed Consolidated Balance Sheets as of  March 31,1999
             (unaudited) and December 31, 1998.............................  2

           Condensed Consolidated Statements of Income for the Three
             Months Ended March 31, 1999 and 1998  (unaudited).............  3

           Condensed Consolidated Statements of Cash Flows for the Three
             Months Ended March 31, 1999 and 1998 (unaudited)..............  4

           Notes to Condensed Consolidated Financial Statements
             (unaudited)...................................................  5

  Item 2.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations......................................... 11

           Results of Operations........................................... 12

           Liquidity and Capital Resources................................. 13

           Backlog......................................................... 14

           Variability of Results; Seasonality; Cyclicality................ 14

           Management Information Systems.................................. 15

           European Monetary Union......................................... 16

           Effect of Recently Issued Accounting Standards.................. 16

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk...... 16

PART II.   OTHER INFORMATION............................................... 17

  Item 2.  Changes in Securities and Use of Proceeds....................... 17

  Item 5.  Other Information............................................... 17

  Item 6.  Exhibits and Reports on Form 8-K................................ 19

SIGNATURES................................................................. 20


                                     - i -
<PAGE>




















              PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
              ----------------------------------------------------

               ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
               ---------------------------------------------------


<PAGE>


                        HAPPY KIDS INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)

                                                        March 31,   December 31,
                                                         1999          1998
                                                        ---------   ------------
                                     ASSETS            (unaudited)

CURRENT ASSETS
    Cash ..............................................   $   490    $   139
    Due from factor ...................................    30,963     20,640
    Accounts receivable - trade, net ..................       595        347
    Inventories .......................................    16,852     23,579
    Prepaid royalties .................................     1,121        762
    Deferred income taxes .............................     1,029      1,029
    Other current assets ..............................     2,531      1,496
                                                          -------    -------
           Total current assets .......................    53,581     47,992
FIXED ASSETS - NET ....................................     1,801      1,459
OTHER ASSETS ..........................................     1,081      1,001
                                                          -------    -------
           Total assets ...............................   $56,463    $50,452
                                                          =======    =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Due to bank .......................................   $ 6,695    $ 3,753
    Accounts payable and accrued liabilities ..........     8,486      7,944
                                                          -------    -------
           Total current liabilities ..................    15,181     11,697

DEFERRED RENT PAYABLE .................................       439        505
DUE TO STOCKHOLDERS ...................................     5,719      5,719
COMMITMENTS
STOCKHOLDERS' EQUITY:
    Preferred stock - 5,000 shares authorized, $.01 par
        value; no shares issued and outstanding .......      --         --
    Common stock - 30,000 shares authorized, $.01 par
        value; 10,280 shares issued and outstanding
        at March 31, 1999 and December 31, 1998 .......       103        103
    Additional paid-in capital ........................    23,263     23,263
    Retained earnings .................................    11,758      9,165
                                                          -------    -------
           Total stockholders' equity .................    35,124     32,531
                                                          -------    -------
           Total liabilities and stockholders' equity..   $56,463    $50,452
                                                          =======    =======


        The accompanying notes are an integral part of these statements.



                                     - 2 -
<PAGE>


                        HAPPY KIDS INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                    (in thousands, except per share amounts)

                                                       For the Three Months
                                                         Ended March 31,
                                                  ---------------------------
                                                     1999             1998
                                                   ----------      ----------

Net sales ...................................      $   45,872      $   35,715
Cost of goods sold ..........................          34,092          27,084
                                                   ----------      ----------
    Gross profit ............................          11,780           8,631
          Operating expenses ................           6,955           5,069
                                                   ----------      ----------
          Operating earnings ................           4,825           3,562
Interest expense, net .......................             354             990
                                                   ----------      ----------
    Income  before income taxes .............           4,471           2,572
Income taxes ................................           1,878             260
                                                   ----------      ----------
          Net income ........................      $    2,593      $    2,312
                                                   ==========      ==========
Basic income
    per common share ........................      $     0.25      $     0.30
                                                   ==========      ==========
Weighted average common
    shares outstanding - basic ..............          10,280           7,750
                                                   ==========      ==========
Diluted income
    per common share ........................      $     0.25      $     0.30
                                                   ==========      ==========
Weighted average common
    shares outstanding - diluted ............          10,310           7,750
                                                   ==========      ==========

Pro forma data (unaudited) :
    Historical income  before
          provision for income taxes ........      $    4,471      $    2,572
    Income taxes ............................           1,878           1,080
                                                   ----------      ----------
          Net income ........................      $    2,593      $    1,492
                                                   ==========      ==========
Pro forma basic net income per share ........      $     0.25      $     0.19
                                                   ==========      ==========
Pro forma weighted average
    common shares outstanding - basic .......          10,280           7,750
                                                   ==========      ==========
Pro forma diluted net income per share ......      $     0.25      $     0.19
                                                   ==========      ==========
Pro forma weighted average
    common shares outstanding - diluted .....          10,310           7,750
                                                   ==========      ==========


        The accompanying notes are an integral part of these statements.



                                     - 3 -
<PAGE>


                        HAPPY KIDS INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (in thousands)
                                                    For the Three Months
                                                       Ended March 31
                                                    --------------------
                                                     1999         1998
                                                   --------    ---------

Cash flows from operating activities:
Net income .....................................   $  2,593    $  2,312
Adjustments to reconcile net income
   to net cash provided by operating activities:
   Depreciation and amortization ...............        110          57
Changes in operating assets and liabilities:
   Accounts receivable .........................       (248)         25
   Due from factor .............................    (10,323)     (2,002)
   Inventories .................................      6,727       2,357
   Prepaid royalties ...........................       (359)       (553)
   Other current assets ........................     (1,035)        403
   Other assets ................................        (80)        (29)
   Accounts payable and accrued expenses .......        476      (4,427)
                                                   --------    --------

Net cash used in operating activities ..........     (2,139)     (1,857)
                                                   --------    --------

Cash flows from investing activities:
   Acquisition of fixed assets .................       (452)         (4)
                                                   --------    --------

Cash flows from financing activities:
   Net borrowings under line of credit .........      2,942       2,318
   Payments on capital lease ...................       --           (18)
   Dividends paid ..............................       --          (366)
   Payments on initial public offering costs ...       --          (224)
                                                   --------    --------

Net cash provided by financing activities ......      2,942       1,710
                                                   --------    --------

Net increase (decrease) in cash ................        351        (151)

Cash at beginning of year ......................        139         374
                                                   --------    --------

Cash at end of period ..........................   $    490    $    223
                                                   ========    ========


        The accompanying notes are an integral part of these statements.



                                     - 4 -
<PAGE>


                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 1 -- Basis of Presentation:
--------------------------------

        The  information  presented as of March 31, 1999 and for the three-month
periods  ended  March 31,  1999 and March 31,  1998 is  unaudited,  but,  in the
opinion of the Happy Kids Inc.'s (the "Company")  management,  the  accompanying
unaudited condensed  consolidated  financial  statements contain all adjustments
(consisting only of normal recurring  adjustments)  which the Company  considers
necessary for the fair  presentation of the Company's  financial  position as of
March 31,  1999 and the  results  of its  operations  and its cash flows for the
three-month  periods  ended March 31, 1999 and 1998.  The  financial  statements
included  herein  have been  prepared  in  accordance  with  generally  accepted
accounting  principles  and the  instructions  to Form  10-Q and  Rule  10-01 of
Regulation  S-X.  Accordingly,  certain  information  and  footnote  disclosures
normally included in financial  statements prepared in accordance with generally
accepted accounting  principles have been condensed or omitted.  These financial
statements  should be read in conjunction with the Company's  audited  financial
statements for the year ended December 31, 1998,  which were included as part of
the  Company's  Annual  Report on Form 10-K,  as filed with the  Securities  and
Exchange Commission (the "SEC") on March 30, 1999.

        Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.

        The  Company was  incorporated  in 1988 in New York under the name O'Boy
Inc. and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities,  with the first of such entities
commencing  operations in 1979, all under the common  ownership of the Company's
then-current  shareholders.  Immediately  prior  to  the  effectiveness  of  the
Company's initial public offering (the "Initial Public Offering"),  as described
in Note 2, all of such separate entities became wholly-owned subsidiaries of the
Company (the  "Reorganization").  The Company issued 4,262,500 additional shares
of  common  stock,  to its  then-current  shareholders,  in  exchange  for their
ownership in these separate business  entities.  All share and per share amounts
throughout  this Form  10-Q have been  restated  to  retroactively  reflect  the
Reorganization.

        The accompanying condensed consolidated financial statements include the
consolidated  accounts  of the  Company  and its wholly  owned  subsidiaries  to
reflect  the  Reorganization  as  stated  above.  All  significant  intercompany
accounts and transactions have been eliminated in consolidation.



                                     - 5 -
<PAGE>


                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 2 -- Initial Public Offering:
----------------------------------

        On April 2, 1998, the Company consummated its Initial Public Offering of
2,200,000  shares of its Common  Stock at a price of $10.00  per  share,  all of
which shares were issued and sold by the Company. On April 23, 1998, the Company
consummated the exercise of the underwriters'  over-allotment  option granted by
the Company to the  underwriters in connection with the Initial Public Offering.
As a result,  the Company  issued and sold an additional  330,000  shares of the
Company's Common Stock at the Initial Public Offering price of $10.00 per share.
The net  proceeds  to the  Company  from such  sales  were  approximately  $22.3
million.

        Of the total net proceeds  received by the Company upon the consummation
of its Initial Public  Offering and the exercise of the  over-allotment  option,
$2.0  million  was  distributed  to  certain  shareholders  of  the  Company  in
connection with the payment of a portion of the S Corporation  distribution made
by the  Company  in  connection  with  the  Reorganization  (the "S  Corporation
Distribution")  and the  remaining  amount was utilized to pay down a portion of
the  outstanding  balance under the Company's bank credit facility (the "Line of
Credit").  See  "Item 2.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations -- Liquidity and Capital Resources."


Note 3 -- Income Taxes:
-----------------------

        Prior to the completion of the Initial Public Offering,  the Company had
elected to be treated  as an S  Corporation  for  Federal  income tax  reporting
purposes. An S Corporation is generally treated like a partnership and is exempt
from Federal income taxes,  with certain  exceptions,  and  shareholders  report
their pro rata share of corporate taxable income or loss on their individual tax
returns.  A  provision  for state  income  taxes was made for those  states  not
recognizing  the  Company's S  Corporation  status.  The Company's S Corporation
status terminated on the day prior to the effectiveness of the Company's Initial
Public Offering described in Note 2.

        Subsequent to the termination of the Company's S Corporation status, the
Company  used the  liability  method  for both  Federal  and  state  income  tax
purposes.  The effect of such change was  reflected in net income for the second
quarter of 1998 when such  termination  occurred  and resulted in an increase in
deferred tax assets and net earnings of approximately $1,024.

        The pro forma  provision  for  income  taxes  represents  the income tax
provision  that would have been reported had the Company been subject to Federal
and additional  state and local income taxes as a C Corporation  for all periods
presented.

        Deferred income taxes are determined based on the difference between the
tax basis of an asset or  liability  and its  reported  amount in the  financial
statements  using  enacted tax rates for the year in which the  differences  are
expected to reverse.



                                     - 6 -
<PAGE>


                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


        The principal  types of differences  between assets and  liabilities for
financial statement and tax return purposes giving rise to deferred income taxes
are accrued  expenses,  accumulated  depreciation,  certain costs capitalized to
inventory  and allowance  for doubtful  accounts.  A deferred tax asset has been
recorded for these differences.


Note 4 -- Due to Shareholders:
------------------------------

        In  connection  with the  termination  of the  Company's  S  Corporation
status,  the Company  agreed to  distribute  an aggregate of $7.6 million to the
Company's  pre-Initial Public Offering  shareholders,  such amounts representing
the Company's  total  undistributed  equity  resulting from the S Corporation or
limited  liability  corporation  ("LLC")  status of the  Company and its related
entities  prior to the  Reorganization,  of which $2.0 million was paid from the
proceeds  of the  Initial  Public  Offering.  The  balance  is due  pursuant  to
four-year  5.7% notes payable to such  shareholders.  Such notes provide for the
timely  distribution of amounts  necessary to pay the remaining  personal income
taxes  of  such  shareholders  or  members  due  on  amounts  earned  by  such S
Corporations or LLCs for the period January 1, 1998 through the termination of S
Corporation  or LLC status of  approximately  $314,000.  In  addition,  existing
amounts due to shareholders of $1.4 million are subject to the same terms as the
above promissory notes.


Note 5 -- Pro forma Information:
--------------------------------

        a.  PRO FORMA RESULTS OF INCOME AND PRO FORMA INCOME TAXES:

        Pro Forma  adjustments  in the  statement  of income for the three month
period ended March 31, 1998 reflect  provisions  for income taxes based upon pro
forma pretax income as if the Company had been subject to Federal and additional
state and local income taxes.

        As  disclosed  in Note 3, the  Company  has,  in the past,  elected  for
certain of its affiliates to be taxed as S Corporations pursuant to the Internal
Revenue Code. In connection  with the Company's  Initial  Public  Offering,  the
Company terminated such S elections and partnership status and became subject to
Federal and additional state and local income taxes. The pro forma provision for
income taxes  represents the income tax provisions that would have been reported
had the Company  been subject to Federal and  additional  state and local income
taxes.  The effective pro forma tax rate of the Company differs from the Federal
rate of 34% primarily due to the effects of state and local income taxes.



                                     - 7 -
<PAGE>


                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


        b.  PRO FORMA NET INCOME:

        Pro forma net income  represents  the  historical  amounts after the pro
forma adjustments discussed above.


Note 6 -- Earnings Per Share:
-----------------------------

        A  reconciliation  between  basic and  diluted  earnings  per share from
operations is as follows:

                                                       Three Months Ended
                                                    -------------------------
                                                            March 31,
                                                            ---------
                                                       1999           1998
                                                   -----------     ----------
                                                   (In thousands except per 
                                                         share amounts)

                 Net Income ...................     $    2,593     $    2,312

                 Basic EPS:
                     Basic common shares ......         10,280          7,750
                                                    ==========     ==========
                     Basic  EPS ...............     $     0.25     $     0.30
                                                    ==========     ==========
                 Diluted EPS:
                     Basic common shares ......         10,280          7,750
                     Diluted common shares ....             30           --
                                                    ----------     ----------
                     Total diluted shares .....         10,310          7,750
                                                    ==========     ==========
                     Diluted EPS ..............     $     0.25     $     0.30
                                                    ==========     ==========


Note 7 -- Accounts Receivable:
------------------------------

        Accounts Receivable consist of the following:

                                                     March 31,     December 31,
                                                       1999          1998
                                                    ----------     ----------
                                                       (In thousands)

                     Accounts Receivable.......     $    1,908     $      860
                     Allowances................          1,313            513
                                                    ----------     ----------
                                                    $      595     $      347
                                                    ==========     ==========


                                     - 8 -
<PAGE>


                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 8 -- Inventories:
----------------------

        Inventories consist of the following finished goods:

                                                    March 31,   December 31,
                                                      1999          1998
                                                    ---------   ------------
                                                        (In thousands)

        Warehouse...............................    $ 12,779     $  16,531
        In-transit, overseas and Raw Materials..       4,302         7,277
        LIFO valuation allowance................        (229)         (229)
                                                    ---------    ----------
                                                    $  16,852    $  23,579
                                                    =========    ==========

        For  the  quarter  ended  March  31,  1998,  the   liquidation  of  LIFO
inventories decreased the cost of sales and, therefore,  increased income before
taxes by $53,000. There was no liquidation of LIFO inventories in 1999.


Note 9 -- Subsequent Events:
----------------------------

        On April 13, 1999, the Company entered into an asset purchase  agreement
(the "Purchase  Agreement")  with D. Glasgow & Sons Inc., a New York corporation
(the  "Seller")  and Mr.  Andrew D. Glasgow,  its sole  shareholder,  to acquire
certain  of  the  assets  (the  "Assets")  of the  Seller.  The  Assets  include
intellectual  property rights under license agreements to design and manufacture
children's  apparel  bearing  logos,  trademarks  and tradenames of the National
Football League, the National Basketball Association,  Major League Baseball and
the National  Hockey  League,  as well as certain Warner  Brothers'  properties,
including  Looney Tunes,  and Saban's Power Rangers,  among other licenses.  The
Company also  acquired  certain  machinery and  equipment  from the Seller.  The
purchase price for the Assets included a cash  consideration of $3.7 million and
the  issuance  of 95,693  shares of Common  Stock of the  Company  having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted  stock. The Purchase  Agreement also provides for the Company
to purchase the Seller's  apparel  inventory for an  additional  cash payment of
approximately $2.9 million.

        In connection with the execution of the Purchase Agreement, Mr. Glasgow,
formerly the  President of the Seller,  was elected as a Director of the Company
in April 1999.  In addition,  Mr.  Glasgow was appointed  Vice  President of the
Company and will serve as  President  of the  Company's  Glasgow  Division.  Mr.
Glasgow also  executed a five (5) year  Employment  Agreement  with the Company.
Under the terms of such  Employment  Agreement,  Mr.  Glasgow is  entitled to an
annual base salary of $250,000  and bonuses  commensurate  with other  executive
officers of the Company, which amounts and payments are within the discretion of
the Compensation  Committee of the Board of Directors.  In addition, Mr. Glasgow
is  also  entitled  to



                                     - 9 -
<PAGE>


                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


receive,  in quarterly payments,  subject to annual adjustment,  a percentage of
certain  divisional  profits and certain  import sales  profits of the Company's
Glasgow Division.  Mr. Glasgow's  Employment  Agreement  requires Mr. Glasgow to
maintain the confidentiality of Company information and requires that during the
term of his  employment  with the  Company  and  thereafter  for a period of two
years,  he will not compete  with the Company in any state or  territory  of the
United  States where the Company does  business by engaging in any capacity in a
business which is competitive  with the business of the Company.  Mr.  Glasgow's
Employment Agreement also provides that, for a period of two years following the
termination  of his  employment  with the  Company,  he shall  not  solicit  the
Company's licensors, customers or employees.



                                     - 10 -
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS.

General
-------

        Happy Kids Inc., a New York corporation ("Happy Kids" or the "Company"),
is a designer and marketer of  custom-designed,  licensed and branded children's
apparel.  The  Company  produces  high-quality,  coordinated  apparel  programs,
including knit tops, bottoms, overalls,  shortalls,  coveralls and swimwear, for
newborns,  infants,  toddlers,  boys and girls (collectively,  "playwear").  The
Company's  major  licenses  include  Nickelodeon's  Rugrats,  AND 1  and  B.U.M.
Equipment.  The Company also designs and delivers private label branded playwear
programs for leading  retailers,  such as Sesame Street for Kmart. The Company's
strategy is to work closely with its customers to design and market  coordinated
playwear  programs  resulting  in gross  margins  that the Company  believes are
higher than those typically  generated from sales of non-licensed or non-private
label branded playwear.

        Prior to and including  much of 1995, the Company's  operating  strategy
primarily focused on developing and marketing its own house brands.  The Company
manufactured  products  for  inventory  under  the  Company's  brands  and often
concentrated  on enhancing sales volume rather than focusing on a combination of
sales volume and gross margins.  The Company  believes that the loss it incurred
in 1995 was primarily  attributable  to these factors.  In 1995, to leverage its
strong customer relationships,  the Company initiated its current sales strategy
under which the  Company's  customers  order  specific  quantities of goods on a
fixed-price  basis  three to nine  months in advance of a selling  season.  As a
result,  substantially all of the Company's playwear is produced upon receipt of
customer orders.  Also in 1995, the Company elected to concentrate on developing
a diversified  portfolio of popular,  established and  well-recognized  licensed
properties and private label  relationships  and  de-emphasized  its reliance on
house brands,  which have been a declining  component of the Company's net sales
in each year since 1995.  Since that time,  the  Company's  strategy has been to
work closely with its  customers to design and market  high-quality  coordinated
apparel programs resulting in gross margins that the Company believes are higher
than those typically  generated from sales of non-licensed or non-private  label
branded playwear.

        Statements contained or incorporated by reference in this Form 10-Q that
are not based on historical facts are  "forward-looking  statements"  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended,
including,   without  limitation,   statements  regarding  the  Company's  sales
strategy,  concentration  on  the  development  of a  diversified  portfolio  of
licensed   properties  and  private  label   relationships  and  gross  margins.
Forward-looking  statements also may be identified by the use of forward-looking
terminology  such  as  "may",  "will",   "expect",   "estimate",   "anticipate",
"continue",  or similar terms, variations of such terms or the negative of those
terms. This Form 10-Q contains forward-looking statements that involve risks and
uncertainties,  including,  but not  limited to,  those  related to: (i) general
economic  conditions;  (ii)  a  dependence  on  license  arrangements;  (iii)  a
dependence  on  private  label  relationships;  (iv) a  dependence  on  contract
manufacturers;  (v) a reliance on key customers;  (vi) a dependence on access to
credit facilities;  (vii) the risks associated with significant  growth;  (viii)
competition;  (ix)  seasonality  of sales;  (x)  cyclicality  and  trends in the
apparel  industry;  (xi) import  restrictions and



                                     - 11 -
<PAGE>


other risks associated with international business;  (xii) the Company's ability
to successfully integrate the licenses recently acquired from D. Glasgow & Sons,
Inc.  into its current  operations;  and (xiii) risks  relating to the Company's
Year 2000  compliance  and the Year 2000  compliance of the  Company's  contract
manufacturers,  suppliers,  distributors,  marketing  partners and certain other
parties.  The Company's  actual results may differ  materially  from the results
discussed in the forward-looking statements contained herein.


Results of Operations
---------------------

        THREE MONTHS  ENDED MARCH 31, 1999  COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998

        Net Sales. Net sales increased $10.2 million, or 28.4%, to $45.9 million
in the first  quarter of 1999 from $35.7  million in the first  quarter of 1998.
The  increase  in net sales is  attributable  primarily  to  increased  sales of
playwear of both licensed products and private label programs.

        Gross Profit. Gross profit increased by $3.2 million, or 36.5%, to $11.8
million in the first  quarter of 1999 from $8.6 million in the first  quarter of
1998.  Such  increase  was due, in part,  to increased  sales in certain  higher
margin licensed products as well as efficiencies in transportation  and handling
costs.

        Operating  Expenses.  Operating expenses  increased by $1.9 million,  or
37.2%,  to $7.0  million in the first  quarter of 1999 from $5.1  million in the
first quarter of 1998.  Operating  expenses consist entirely of selling,  design
and shipping expenses, and general and administrative expenses.

             Selling,  Design and Shipping Expenses.  Selling, design and
        shipping  expenses  increased by $1.3 million,  or 45.5%, to $4.3
        million  in the first  quarter  of 1999 from $3.0  million in the
        first quarter of 1998. This increase is attributable primarily to
        higher sales  compensation,  advertising and shipping and freight
        costs  associated  with  increased  sales  volumes.  In addition,
        design and production  salaries and sampling costs increased as a
        result of the Company's  expanded  product lines. As a percentage
        of net sales, selling,  design and shipping expenses increased to
        9.4% in the first  quarter of 1999 from 8.3% in the first quarter
        of 1998.

             General   and   Administrative    Expenses.    General   and
        administrative  expenses  increased  $537,000,  or 25.5%, to $2.6
        million  in the first  quarter  of 1999 from $2.1  million in the
        first  quarter of 1998.  This increase is primarily the result of
        higher payroll and related payroll costs including  payroll taxes
        and benefits,  factor commissions associated with increased sales
        volume,  as well  as  higher  professional  and  data  processing
        expenses.   As  a   percentage   of  net   sales,   general   and
        administrative expenses decreased to 5.8% in the first quarter of
        1999 from 5.9% in the first  quarter of 1998 due to the operating
        leverage associated with the higher sales.



                                     - 12 -
<PAGE>


        Interest  Expense,  net. Interest expense,  net decreased  $636,000,  or
64.2%,  to  $354,000  in the first  quarter of 1999 from  $990,000  in the first
quarter of 1998.  This decrease is a result of the  application of a substantial
portion of the proceeds from the Company's  initial public  offering (the "IPO")
to the repayment of the Company's  bank debt in the second quarter of 1998. As a
percentage  of net  sales,  interest  expense  decreased  to 0.8% for the  first
quarter of 1999 compared to 2.8% in the first quarter of 1998.

        Income Before Income Taxes.  Income before income taxes  increased  $1.9
million,  or  73.8%,  to $4.5  million  in the first  quarter  of 1999 from $2.6
million in the first quarter of 1998 due to the reasons  described  above.  As a
percentage of net sales,  income  before  income taxes  increased to 9.7% in the
first quarter of 1999 from 7.2% in the first quarter of 1998.


Liquidity and Capital Resources
-------------------------------

        The  Company  has  financed  its  cash  requirements  primarily  through
operations  and  borrowings  under its bank line of  credit.  Historically,  the
Company's borrowing  requirements have been seasonal,  with peak working capital
needs arising during the first and third quarters.

        On April 2, 1998, the Company consummated its IPO of 2,200,000 shares of
its common stock, $0.01 par value (the "Common Stock"), at a price of $10.00 per
share,  all of which  shares were issued and sold by the  Company.  On April 23,
1998, the Company  consummated the exercise of the underwriters'  over-allotment
option granted by the Company to the underwriters in connection with the IPO. As
a result,  the  Company  issued  and sold an  additional  330,000  shares of the
Company's Common Stock at the IPO price of $10.00 per share. The net proceeds to
the Company from such sales were approximately $22.3 million.

        Of the total net proceeds  received by the Company upon the consummation
of its IPO and the  exercise  of the  over-allotment  option,  $2.0  million was
distributed  to  certain  shareholders  of the  Company in  connection  with the
payment of a portion of the S Corporation  distribution and the remaining amount
was  utilized  to pay  down a  portion  of the  outstanding  balance  under  the
Company's credit line.

        On March 31,  1999,  the Company  executed an  amendment of its existing
credit  line  whereby  the  Company's  credit  line was amended to provide for a
discretionary  one year revolving  line of credit,  to expire on March 31, 2000,
renewable annually,  providing for advances and letter of credit  accommodations
up to the lesser of (a) $50.0  million from April 1, 1999 to March 31, 2000,  or
(b) at all times the sum of (i) up to eighty-five  percent of eligible  accounts
receivables,  plus (ii) up to fifty percent of finished  goods  inventory,  plus
(iii)  overadvances  approved by the lender.  The  maximum  amount of  revolving
credit  advances  outstanding  at any time cannot  exceed $40.0  million and the
maximum amount of letters of credit outstanding at any time may not exceed $35.0
million.  The  interest  rate  on  amounts  borrowed  will  be the  bank's  then
prevailing prime rate (7.75% at March 31, 1999) less 0.5% or at LIBOR plus 2.0%,
at the option of the Company. The credit line is collateralized by substantially
all of the assets of the  Company.  As of March 31,  1999,  the Company had $6.7
million  of  outstanding  direct  borrowings  and $12.6  million  of  contingent
liabilities under open letters of credit.



                                     - 13 -
<PAGE>


        In  addition,  the  Company's  lender  has  sole  discretion  to make or
withhold  advances  under the credit line.  There can be no  assurance  that the
lender will continue to lend under the credit line. If the lender  exercises its
discretion to withhold advances, there would be a material adverse effect on the
Company's business, financial condition and results of operations.

        As of March 31, 1999, the Company's other principal sources of liquidity
included  cash of  $490,000,  amounts due from  factor of $31.0  million and net
accounts  receivable  of  $595,000.  The Company  had  working  capital of $38.4
million and long-term debt of $6.2 million as of March 31, 1999.

        For the quarter ended March 31, 1999,  operating activities used cash of
$2.1 million  primarily as a result of an increase in amounts due from factor of
$10.3 million,  an increase in other current  assets of $1.0 million,  offset in
part by net income of $2.6 million and an increase in inventory of $6.7 million.
Net cash used in  financing  activities  during the same period was $2.9 million
consisting of payments under the Company's credit line.

        Historically,  the  Company's  business  has  not  required  significant
capital  expenditures.  The Company's capital expenditures for the first quarter
of 1999 and 1998, were $452,000 and $4,000, respectively. The Company expects to
incur capital expenditures in 1999 totaling $1.0 million for the purchase of new
computers,  software and telecommunications equipment. The Company believes that
cash flow expected to be generated  from  operations,  together with  borrowings
under its existing credit line, as amended,  will be adequate to satisfy current
and planned operations for at least the next twelve (12) months.


Backlog
-------

        The  Company's  customers  order  specific  quantities  of  goods  on  a
fixed-price  basis  three to nine  months in advance of a selling  season.  Such
customer  orders are placed in backlog upon their receipt and  acceptance by the
Company.  Customer  orders are  generally  cancelable  on notice to the  Company
without penalty.  Although the Company has not had significant  cancellations in
the past,  no assurance  can be given that it will not  experience a significant
level of  cancellations  in the future or that its  backlog at any point in time
will  be  converted  to  sales.  Many  of  the  Company's  orders  are  received
significantly  in advance  of  scheduled  delivery  periods.  Consequently,  the
Company had backlog of $106.7 million at March 31, 1999, all of which it expects
to ship  over the next  three to nine  months.  However,  in recent  months  the
Company has  experienced  a  significant  increase  in orders  involving a rapid
turnaround from the date the order is placed to the shipment date.


Variability of Results; Seasonality; Cyclicality
------------------------------------------------

        Sales of children's  apparel are seasonal.  Consequently,  the Company's
operating  results have varied  substantially  from quarter to quarter,  and the
Company  expects that they will  continue to do so.  Generally,  the Company has
experienced  significantly  higher net sales in the first and third  quarters as
compared to the second and fourth  quarters,  although this may change from time
to time. The seasonality of the Company's business also affects borrowings under
the  Company's



                                     - 14 -
<PAGE>


lines of credit and its level of backlog,  which fluctuate in response to demand
for the Company's products. Therefore, the results of any interim period are not
necessarily  indicative  of the results that may be achieved for an entire year.
In addition,  the apparel industry is a cyclical industry heavily dependent upon
the overall level of consumer  spending,  with  purchases of apparel and related
goods tending to decline during  recessionary  periods when disposable income is
low. A difficult  retail  environment  could result in downward  price  pressure
which could adversely impact the Company's gross profit margins.


Management Information Systems
------------------------------

        GENERAL

        The Company believes that advanced  information  processing is essential
to  maintaining  its  competitive  position.  The  Company  participates  in the
electronic data interchange  program maintained by many of its larger customers,
including JC Penney, Kids R Us, Sears,  Target and WalMart.  This program allows
the Company to receive  customer  orders,  provide  advanced  shipping  notices,
monitor store  inventory and track orders  on-line from the time such orders are
placed through delivery.

        YEAR 2000 COMPLIANCE

        In 1998, the Company established an oversight committee to review all of
the Company's computer systems and programs,  as well as the computer systems of
the third  parties upon whose data or  functionality  the Company  relies in any
material  respect,  and to assess their ability to process  transactions  in the
Year 2000 and beyond. The Company,  through such oversight committee,  currently
is upgrading its management  information  systems,  which it expects to complete
during the second quarter of 1999, to ensure proper  processing of  transactions
relating to Year 2000 and beyond. The Company continues to evaluate  appropriate
courses  of  corrective  actions,  including  replacement  of  certain  systems.
Although the Company does not expect the costs  associated  with  ensuring  Year
2000 compliance to have a material  affect on its financial  position or results
of  operations,  if the  computer  systems  used by the  Company,  or any of its
suppliers or vendors fail or experience significant  difficulties related to the
Year 2000,  the Company  could  experience  delays in  manufacturing,  delays in
shipping, an inability to monitor customer orders or to manage inventory, or may
experience  related risks that could  materially  adversely affect the Company's
financial position or its results of operations.  The Company has identified and
been in contact  with its major  customers,  its bank and its factor.  The reply
from each such entity  indicates that each is, or will be, Year 2000  compliant.
The  Company  has  incurred  approximately  $50,000  of  expenses  for Year 2000
remediation costs in 1999 and estimates future additional  expenditures for Year
2000 remediation of approximately  $100,000. All costs associated with Year 2000
compliance  are being funded with cash flow  generated  from  operations and are
being  expensed as incurred.  The Company has not developed a  contingency  plan
with respect to Year 2000 issues should they arise.



                                     - 15 -
<PAGE>


European Monetary Union
-----------------------

        On  January 1,  1999,  eleven of the  fifteen  member  countries  of the
European  Union  set  fixed  conversion  rates  between  their  existing  legacy
currencies and the euro. As such, these  participating  countries have agreed to
adopt  the  euro as  their  common  legal  currency.  The  eleven  participating
countries will issue  sovereign debt  exclusively in euro and will  redenominate
outstanding  sovereign  debt. The legacy  currencies will continue to be used as
legal tender through January 1, 2002, at which point the legacy  currencies will
be canceled and euro bills and coins will be used for cash  transactions  in the
participating countries.

        The Company does not  denominate  its  agreements or  transactions  with
foreign entities in foreign  currencies.  The Company currently does not believe
that the euro conversion will have a material impact on the Company's  financial
condition or results of operations.


Effect of Recently Issued Accounting Standards
----------------------------------------------

        In  June  1998,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 133 ("SFAS No. 133"),  "Accounting for Derivative  Instruments and
Hedging  Activities,"  which is effective for the  Company's  fiscal year ending
December  31,  2000.  SFAS No. 133 will  require  the Company to  recognize  all
derivatives on the balance sheet at fair value.  Adoption of SFAS No. 133 is not
expected to have a material effect on the Company's financial statements.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Exposure
----------------------

        The  Company  is  subject  to market  risk from  exposure  to changes in
interest rates relating primarily to the Company's  short-term debt obligations.
The Company  primarily  enters into such short-term debt  obligations to support
general corporate purposes,  including capital  expenditures and working capital
needs.  All of the Company's debt is short-term  with variable  rates. To manage
its exposure to changes in interest  rates,  the  Company's  policy is to manage
such interest rate exposure through the use of short-term borrowings,  which are
negotiated  with their lenders on an annual  basis.  The Company does not expect
changes in interest  rates to have a material  adverse  effect on income or cash
flows in fiscal 1999,  although  there can be no assurance  that interest  rates
will not significantly change.



                                     - 16 -
<PAGE>


                                     Part II

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

        Changes in Securities
        ---------------------

        On April 13, 1999, the Company issued 95,693 shares of restricted Common
Stock having a fair market value of $1.0 million to Andrew D. Glasgow. See "Item
5. Other Information."

        In addition,  in January  1999,  the Company  granted  stock  options to
purchase an  aggregate  of 100,000  shares of its Common  Stock with an exercise
price of $14.85 per share to a certain  Director  and  executive  officer of the
Company and 25,000  shares of its Common Stock with an exercise  price of $13.50
per share to a certain  executive  officer of the  Company.  Such  options  were
granted at  exercise  prices of 110% and 100%,  respectively,  of the grant date
fair market value of the Company's Common Stock. All of such options were issued
pursuant to the Company's 1997 Stock Plan. The shares of Common Stock underlying
such options have not yet been registered under the securities laws.

        The  Company  did not  employ  an  underwriter  in  connection  with the
issuance or sale of the securities  described above. The Company claims that the
issuance or sale of the foregoing  securities was exempt from registration under
either (i) Section 4(2) of the  Securities  Act of 1933, as amended (the "Act"),
as transactions  not involving any public  offering and such  securities  having
been acquired for investment and not with a view to  distribution,  or (ii) Rule
701 under  the Act as  transactions  made  pursuant  to a  written  compensatory
benefit  plan or  pursuant  to a  written  contract  relating  to  compensation.
Appropriate  legends were affixed to the stock certificate  issued in connection
with the Glasgow transaction.  All recipients had adequate access to information
about the Company.


ITEM 5.  OTHER INFORMATION.

        Asset Purchase
        --------------

        On April 13, 1999, the Company entered into an asset purchase  agreement
(the "Purchase  Agreement")  with D. Glasgow & Sons Inc., a New York corporation
(the  "Seller")  and Mr.  Andrew D. Glasgow,  its sole  shareholder,  to acquire
certain  of  the  assets  (the  "Assets")  of the  Seller.  The  Assets  include
intellectual  property rights under license agreements to design and manufacture
children's  apparel  bearing  logos,  trademarks  and tradenames of the National
Football League, the National Basketball Association,  Major League Baseball and
the National  Hockey  League,  as well as certain Warner  Brothers'  properties,
including  Looney Tunes,  and Saban's Power Rangers,  among other licenses.  The
Company also  acquired  certain  machinery and  equipment  from the Seller.  The
purchase price for the Assets included a cash  consideration of $3.7 million and
the  issuance  of 95,693  shares of Common  Stock of the  Company  having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted  stock. The Purchase  Agreement also provides for the Company
to purchase the Seller's  apparel  inventory for an  additional  cash payment of
approximately $2.9 million.



                                     - 17 -
<PAGE>


        Management Change and Addition to the Board of Directors
        --------------------------------------------------------

        In connection with the execution of the Purchase Agreement, Mr. Glasgow,
formerly the  President of the Seller,  was elected as a Director of the Company
in April 1999.  In addition,  Mr.  Glasgow was appointed  Vice  President of the
Company and will serve as  President  of the  Company's  Glasgow  Division.  Mr.
Glasgow also  executed a five (5) year  Employment  Agreement  with the Company.
Under the terms of such  Employment  Agreement,  Mr.  Glasgow is  entitled to an
annual base salary of $250,000  and bonuses  commensurate  with other  executive
officers of the Company, which amounts and payments are within the discretion of
the Compensation  Committee of the Board of Directors.  In addition, Mr. Glasgow
is  also  entitled  to  receive,  in  quarterly  payments,   subject  to  annual
adjustment,  a percentage of certain divisional profits and certain import sales
profits of the Company's Glasgow Division.  Mr. Glasgow's  Employment  Agreement
requires Mr. Glasgow to maintain the  confidentiality of Company information and
requires that during the term of his employment  with the Company and thereafter
for a period of two years,  he will not compete with the Company in any state or
territory of the United  States  where the Company does  business by engaging in
any  capacity  in a  business  which is  competitive  with the  business  of the
Company.  Mr. Glasgow's Employment Agreement also provides that, for a period of
two years following the termination of his employment with the Company, he shall
not solicit the Company's licensors, customers or employees.



                                     - 18 -
<PAGE>


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

        (a)    Exhibits.

               4.1    Asset Purchase  Agreement,  dated as of April 13, 1999, by
                      and among the Company,  D. Glasgow & Sons, Inc. and Andrew
                      Glasgow.   (Incorporated   herein  by   reference  to  the
                      Company's  Current  Report  on Form 8-K filed on April 27,
                      1999.)

               10.1   Amendment  No.  6,  dated as of  March  31,  1999,  to the
                      Company's  Financing  Agreement with CIT  Group/Commercial
                      Services,  Inc.,  as agent for  itself and  certain  other
                      lenders, as previously amended.

               10.2   Employment  Agreement,  dated as of April 13, 1999, by and
                      between  the  Company  and Andrew  Glasgow.  (Incorporated
                      herein by reference  to the  Company's  Current  Report on
                      Form 8-K filed on April 27, 1999.)

               27     Financial Data Schedule.

        (b)    Reports on Form 8-K.

               On April 27, 1999, the Company filed a Current Report on Form 8-K
               in connection  with the  acquisition by the Company of certain of
               the assets of D. Glasgow & Sons, Inc.



                                     - 19 -
<PAGE>


                                   SIGNATURES


        Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                     Happy Kids Inc.




DATE:     May 17, 1999               By:  /s/ Jack M. Benun
                                        ---------------------------------
                                          Jack M. Benun
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)




DATE:     May 17, 1999               By:  /s/ Stuart Bender
                                        ---------------------------------
                                          Stuart Bender
                                          Chief Financial Officer
                                          (Principal Financial and Accounting 
                                           Officer)